The Dark Side of Budgeting

“Hey, do you use the Mint.com app? I think it would be a great way for me, for example, to take a look at my restaurant budget and determine whether to get filet Mignon or to get chopped sirloin when I’m out at a restaurant.”

It was a seemingly simple and harmless question and instead of just responding with, “Sure, Mint is great!”, I decided to make it a teachable moment.

Budgets are everywhere. I have created, shared, and used a budget planning spreadsheet on 20somethingfinance. The gurus all recommend them. Surely, there is nothing bad that can come from a budget, right?

When used correctly, budgets allow you to:

See where you are bleeding money and where to cut back.

Analyze whether your income will cover your expenses over a period of time.

Prioritize in tough times.

These are all good things that can be derived from tracking your expenses effectively.

But, budgeting is not always your friend. It has a dark side. It can be harmful if used as a bar to spend up to as my friend was planning to use it as.

What good can come from setting an arbitrary budget cap in a given category based on past expenses and then spending up to it?

When you do that, you are giving yourself permission to spend, kind of like an “allowance”. And then your expenses never decrease.

I’ve known people who do this, and then increase their allowance in each category by the % raise they receive each year.

There is a better way.

It is absolutely essential to track all of your expenses over a period of time. Keep doing that.

“Instead of asking the question, “will it be filet mignon or chopped sirloin tonight, as determined by my budget?”, the question should be, “how can I learn how to cook filet mignon, chopped sirloin, or better yet, switch to a cheap vegetarian diet, so that I can cut the cost of dining out, but not miss out on good food?” instead.”

When you adopt this line of thinking, your lifestyle begins to shift, and your expenses start to drop dramatically. More than anything else, spending is a byproduct of how we value consumption in our lifestyle.

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7 Comments

Ryan @ LifeFreshOut

Personally, I like using my budget the way that your friend mentioned. When I go out to eat, I’ve already decided that going out is going to fit into my ‘restaurant’ budget, and I look at how much I have left in the budget to determine if I’m going to get an appetizer or not or other similar decisions. I’ve already set a limit on the budget based on what I feel comfortable spending in certain categories, but I don’t always remember where I’m at for the month so it’s helpful to use as a reference. When a raise or other event happens, I usually direct that towards savings, and when I’m looking to cut back, (which I do often), I usually just decrease the category limits in mint and use that as my guide. Otherwise, I feel like just cutting back randomly on spending will keep me from concentrating on categories that are more important to me than others.

I am always looking at menus to get an idea for what I can cook at home, because a filet for example is easily half the price when bought at a supermarket and prepared at home.

I’ve never been very good at budgeting, because it’s always seemed so arbitrary to me. How am I supposed to decide how much money I should allot to food or entertainment? When I started to get serious about frugality, I joined Mint. For the first month, I started setting budget categories based on the areas where I spent the most money, but I set an arbitrary dollar amount for those budget areas. After a month of living frugally, I looked at my savings rate and said “that’s a good savings rate, and I didn’t suffer to get there.” So I took my spending from that month and that’s where I set my budget. For me, I couldn’t just look at the numbers on a spreadsheet and decide where I needed to spend less, I had to dive in head first and figure out where I actually COULD spend less and what was maintainable. I suspect there are many ways to approach budgeting, and if one way doesn’t work for you, try another way.

It sounds like your friend really isn’t interested in frugality, more that he just wants to make sure he doesn’t spend more than he earns. You’re probably not going to be able to convert him, so if his form of budgeting helps him with his personal goals, I think that’s good enough.

Your article is thought-provoking, but I would argue the exact opposite. If all your budget does is track expenses, there seems to be no point in doing it in the first place. The point of tracking expenses is to identify ways to better understand where you are at so you can identify cutbacks and the need to re-allocate funds. But if your tracking leads to no changes, there’s little point in having one.

Reminds me a bit of our Government’s debt ceiling. It’s there, but doesn’t seem to make a difference in actual spending.

I disagree with this sentiment completely. While it is certainly beneficial to look at past expenses to see where you have spent, not creating a budget (by definition, a monetary plan for the future… how can you be against that?) is still a great idea.

Even if your very first one is based on arbitrary numbers, the benefits come from the iterative changes each month. If cutting back truly is a goal, then in a few months you’ve accomplished: confidence that you can follow a budget, a very real look at your expenses, projections for what you can save into the future, and an ability to predict upcoming expenses.

Additionally, I’d like to add that going to a restaurant isn’t inherently wrong, especially if you enjoy it. It’s perfectly possible to become financially independent and budget a couple of night’s out in a month. Not to be used as an excuse for overspending, but in many instances it amounts to spending more time with friends and deepening relationships, which in turn weild much more value than money anyway.

Have read your blog for the last couple of years and have enjoyed it very much (with only a few exceptions). Thanks for the thoughts!

It’s not that budgeting isn’t helpful for some (it is). If you want to take your finances to the next level, however, it’s not done through budgeting. It’s done through lifestyle change.

Try thinking about it this way – there are three kinds of expenses people have:
1. defined amount, and recurring
2. undefined amount, but recurring
3. undefined amount, non-recurring

1. Defined and recurring (i.e. rent, insurance) are already defined. You know what they are and they aren’t changing unless you change your lifestyle. Want to reduce your rent? Get rid of some of your stuff and move from a 3 to a 2 bedroom. Putting a $ amount on your budget means nothing unless you take action to change your lifestyle or reduce the expense.

2. Undefined but recurring (i.e. grocery, restaurant, utilities) – budgeting might be helpful, but lifestyle change that impacts spend level is significantly more influential. For example, if you replace all of your lights with LED’s because you want to reduce your impact on the environment, you will significantly lower your electricity expense. Budgeting won’t help you at all in reducing your electricity costs. Want to reduce your restaurant costs? Change your diet or cook more. Budgeting won’t help much because you’ll just spend up to it.

3. Undefined, non-recurring (i.e. a new bike, a new phone, clothes) – most of these items are impulsive or wantful buys. What would be more helpful – to have a spend fund set aside like an allowance to spend up to, or change your lifestyle so you only buy what you truly need? I would argue that you don’t need a budget set aside at all for these types of items – it might cause more harm that good to do so because it creates a “use it or lose it” mentality for many folks.

I still vehemently disagree. Mainly on the grounds that this idea only works when you cut back all the way to what you “truly need,” which quite frankly is dumb when you think about it. The definition of that term is to use only what you need to survive, or more liberally, what you need to get the job done.

Here’s a case using one of your favorite subjects (and one of my personal lifestyle choices as well), biking to work:

A guy makes the awesome decision to begin biking to work, but doesn’t have a bike. He can buy a $5 bike at a garage sale – pink and sized for a kindergardener, a $50 bike also at a garage sale – multiple speed mountain bike, or a $500 bike at a bike store – budget road bike. According to your above argument, he should obviously choose the $5 bike. It’ll still get him to work, take a little more time than the other two, but who cares he’s saving money.

Obviously this is preposterous. You choose the $50 dollar bike (some would argue the $500). Why? It’s not the cheapest (by the way, the cheapest would be to walk), and it’s not the fastest or longest lasting. What gives! The answer is there are always more factors than just money to decisions. That should be bolded. It’s called personal finance for a reason.

The budget is a tool that allows you to weigh in your expenses with all the other factors of life. I’m a personal finance geek too, and it’s really hard to accept that you can’t just optimize the equation based on one hard number, but it’s simply not the case. That’s why it takes so much discipline, willpower, and strength of character to win, because you have to make decisions every day that require thought and sacrifice.

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